This is a common question workers ask their employers during tax season. When W-2 forms start to roll out, workers may notice a difference in the amounts shown on their end of year pay stub and the taxable wages on their W-2 form.
For those not familiar with the complexities of compensation and taxes, it can be confusing information to understand. The reality is, unless no deductions have been taken from a worker's pay, their last pay stub and their W-2 will almost never match. They may reflect different wages. End of year pay stubs will show the total, or gross earnings, the worker received. The W-2 is a summary of taxable earnings received in the calendar year.
The differences can vary due to a few reasons.
1. The worker's earnings included non-taxable income items, such as, benefits, allowances, reimbursements, mileage, per diems, etc. that reflected on the worker's paycheck.
2. The worker participated in a company sponsored retirement plan, like a 401k, IRA, 403b.
3. The worker receives pre-tax benefits from the employer, such as health, dental or vision insurance plans. These will lower the taxable wages. This is the most common reason for differences in taxable vs earned wages.
Another question that comes up is, "Why wasn't I able to max out my elective contributions?" (such as 401K, HSA, IRA, etc.) This has to do with the conflict between benefit enrollment time frames and how the IRS reports based on earnings received during the calendar year. What does that mean?
Example:
You are on a traditional semi-monthly payroll cycle. You work the 1st-15th of the month and get paid on the 16th. Then you work the 16th-end of the month and get paid on the 1st. You want to contribute $100/month to your 401K. So, that would mean $50 is taken from your pay on the 16th and the 1st. This works great until you get to December. The enrollment timeframe is based on the calendar month so your pay stub is going to show that you contributed $100 for the month of December. However, the IRS treats this differently. Since your pay was issued on the 1st of January in the next tax year, the IRS records that payment in the new tax year. This results in your W-2 being $50 less than you're expecting.
If you want to max out your benefits at the end of the year, make sure you do your calculations based on the date in which you receive your pay, not the end of the pay period.
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